Relationshiop between central bank official currency rates and spot forex
Relationshiop between central bank official currency rates and spot forex
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Homunculus Reticulli · External communityPost link
External question — Quantitative Finance Stack Exchange
Author: Homunculus Reticulli
Original post: https://quant.stackexchange.com/questions/17686
License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/
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Central banks publish official figures for domestic interest rates, as well as spot currency rates for a few select countries (largest trading partners).
To prevent arbitrage, I "expect" that in the absence of any intraday shocks to the system, the central banks figures will (and the possibility of arbitrage), should keep intraday prices "in check" - that is within reason.
I do not trade forex actively myself, so I do not know if this inference from the fundamentals (pun unintended), is borne out in practise.
My question therefore is this:
In lieu of actual EOD data for forex market data, is it practical (i.e. sensible), to use bank official rates as a proxy for actual EOD spot currency rates?
This would obviously be flawed for intraday trading, but for lower frequency trading, I imagine that the series (official rates and market spot values), will be highly cointegrated - and therefore, the former can act as a proxy for the latter - am I correct?
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q.t.f. · External communityPost link
External answer — Quantitative Finance Stack Exchange
Author: q.t.f.
Original post: https://quant.stackexchange.com/a/17688
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Yes, you can use e.g. the ECB daily official foreign exchange rate data as a reliable and consistent daily timeseries. ECB does a fixing at 14:15 CET, by some methodology they call a "daily concertation procedure". I don't easily find a description of the details (are they considering only traded prices, or bids and offers? How long of a time window around 14:15 may used? etc.) But for purposes of daily vol, correlation, etc. such details won't matter. It is a consistent dataset with a consistent methodology giving daily market exchange rates.
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